The objectives of this study were to describe the cost distribution of pneumonia treatment in tertiary hospitals in the National Capital Region (NCR) and to identify variations in costs in order to provide basic information to the Philippine Health Insurance Corporation (PHIC) for quality assurance and policy development. This study focuses on 3861 reimbursement claims, which come from 22 government and 38 private tertiary hospitals. Wide variations of cost existed among the hospitals and among the inpatients. Medicine was the leading expenditure in total costs (38%), second was examinations (27%), third was beds (22%) and the last was doctors fees (13%). The same ranking ocurred for reimbursement by PHIC. The private hospitals were more expensive than the government hospitals, but also more efficient in the length of hospitalization. The member patients spent more and were reimbursed more for clinical practice than the dependent patients. However, there was no difference in the length of hospitalization between member and dependent patients. There was no difference in the length of hospitalization and expenditure between Government Service Insurance System (GSIS) in 1997 and Social Security System (SSS) patients. Clinical guidelines should be effectively implemented and PHIC should contribute more to reduce existing variations, improve cost-effectiveness and the quality of clinical practices.